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‘Dear CEO’ regulatory warning letters hit a high

A record number of warning letters were sent to the CEOs of regulated companies by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) last year, with numbers up by a fifth according to research by BDO

Pat Sweet

The firm says 23 regulatory warning letters were issued in 2019/20, up from 19 in 2018/19, and predicts the upwards trend is likely to continue during the Covid-19 crisis.

In comparison, a decade ago regulators would rarely issue more than one ‘Dear CEO’ letter a year, with BDO saying the increase is a result of their effectiveness in focusing financial services firms’ attention on high-risk issues.

A particular focus in recent years has been on protecting retail investors as the FCA puts more emphasis on consumer protection in areas such as peer-to-peer lending or sub-prime lending.

Two ‘Dear CEO’ letters have already been issued by regulators raising concerns about how firms are addressing the coronavirus.

The FCA has issued a letter urging all firms providing services to retail investors to offer clear advice and provide support to their customers during the crisis, while the PRA has urged all lenders not to impose penalties or restrictions on customers breaching loan covenants due to coronavirus.

BDO says many of the warning letters also carry the implicit, or often explicit, message that if the compliance failings highlighted in the letter are not dealt with then the senior management of that business may be held to account.

As well as specifically targeting the most senior executives in regulated firms, the impact of such letters is also helped by the publicity and media scrutiny that typically accompanies their publication.

These letters require the CEO to confirm the contents have been read, understood and that the firm is operating in compliance with regulatory rules. These written responses then help regulators understand if there is an unclear division of responsibility at a firm and to discuss remedial action with firms.

Leigh Treacy, head of financial services advisory at BDO, said: ‘The record number of “Dear CEO” letters suggests the FCA and PRA feel that they work.

‘Regulators feel that communicating direct with CEO cuts through the noise and concentrates the mind.’

BDO says the impact of the virus outbreak on individuals’ investment portfolios and pensions and on lending, could prompt regulators to issue further warning letters to firms to ensure they are taking steps to mitigate the financial impact caused by the crisis.

Treacy said: ‘We also expect that the coronavirus will give a further impetus to the digitisation of financial services with increased demand for fintech innovations in underwriting and AML and as such, we are likely to see more “Dear CEO” letters focused on this challenger element of retail financial services.”